Self-employment: a means to reduce poverty in developing countries?

Abstract

PurposeWith self-employment providing earning opportunities to many working poor in developing countries, the study examines its role in alleviating poverty.Design/methodology/approachA five-year average of 56 developing countries from 1995–2019 is used. The empirical analysis is based on the dynamic two-step system GMM approach. While poverty is measured in terms of incidence, depth and severity; self-employment is used in three forms – total, male and female.FindingsIn line with the theoretical prediction, evidence suggests that self-employment in developing countries reduces poverty, albeit smaller magnitude. However, the poverty-reducing effects of self-employment differed based on poverty measure and threshold. The poverty-reducing effects are more prominent in poverty severity than incidence and intensity, and the magnitude of the impact is largest when poverty is measured at $1.90 a day as against $3.20 and $5.50 a day. Finally, the poverty-reducing effects of female self-employment are lower than their counterparts.Practical implicationsFirst, poverty-mitigating strategies in developing countries are advised to recognise self-employment as an essential tool to alleviate poverty. Consequently, alongside supporting the existing self-employed, policy focus should be on creating more and better self-employment opportunities for the poor. Second, rather than using generic measures to mitigate poverty, interventions specific to poverty measures and thresholds might ensure the maximum impact of such interventions. Third, gender-specific rather than gender-neutral labour market policies in addressing poverty are advised.Originality/valueTo the best of the author’s knowledge, this is the first study to examine the empirical relationship between self-employment and poverty. As such, it makes novel contributions to both labour and development economics.